ETFs are seeing a record increase in popularity.
The industry hit a milestone with more than 3,000 ETFs trading simultaneously for the first time this month — a 30 percent increase since December 2020, according to Morningstar.
“We started with basically getting very broad index funds – SPY [SPDR S&P 500 ETF Trust] was the first – and then, the industry over the years built all these interesting overlays,” Nick Colas, co-founder of DataTrek Research, told Bob Pisani on CNBC.ETF Edge” this week.
This includes industry and emerging funds, as well as funds designated for topics such as clean energy and legal marijuana, as part of the transition from disruptive innovation to ownership, Colas said. religion.
“Investors are now really spoiled for choice between being able to choose not only the big funds in the sector or the big overall funds but any type of fund that they think might be interesting,” he added. .
However, according to investment consultant Charles Ellis, author of two upcoming books, “Inside Vanguard” and “Figuring It Out,” moving toward the specifics of topical ETFs like ETFs is risky. While Ellis believes it’s fine for people to get into ETFs to later get into index funds, those who opt for highly specialized ETFs run the risk of making disastrous mistakes.
“The more you get into the specifics, the more likely you are that you won’t be able to make a rational long-term decision and you’ll have a hard time making a decision, because we’re all human, a short-term decision brings emotional, and you won’t like the results in the long run,” says Ellis.
With the rapid growth in the number of ETFs, investors will soon be celebrating another major milestone. In January 2023, the first ETF – the SPDR S&P 500 ETF Trust – will turn 30 years old. Currently the largest ETF and one of the largest in the world, SPY is valued at $350 billion in assets under management.
Colas said SPY is exactly the right product to start with, unlike emerging market ETFs, which have performed poorly after their boom and bust cycles.
Pisani said the growth of ETFs and more active funds is partly due to people in mediocre mutual funds converting to ETFs. Colas says there are fewer fees associated with ETFs than mutual funds, as well as less tax liability.